“With the near doubling of public capex in the government’s agenda, capex recovery is likely to continue driving economic and corporate earnings growth for equity markets in the near future,” she says.
In this chat with ETMarkets, Goh also shares expectations from Budget, earnings outlook and more.
A consensus view on Dalal Street is growing that the upcoming Union Budget will be in sync with the existing agenda around capex, growth, and manufacturing. What are your expectations?
The incumbent NDA coalition is expected to follow through with policies that were kickstarted in the previous term, including expanding the manufacturing footprint and capex push. With much of the recent emphasis on supply-driven reforms, we think authorities may begin to explore consumption-driven stimulus and direct support for the agricultural sector. However, a complete shift towards competitive populism is unlikely. Changes requiring deeper constitutional modifications, which are not particularly growth-accretive, are not anticipated.
The Budget is set against the backdrop of strong tax and nontax revenues in FY24 besides firm growth, which helped the government to even better the revised estimate of the deficit by 20bp to -5.6% of GDP vs revised -5.8%. After a strong supply-side push on the reforms, we now expect some demand-side measures and focus on the agricultural sector impacted by unfavourable weather conditions. A complete reorientation towards competitive populism is not on the cards but pushes for a more inclusive growth agenda. Elsewhere, the broader contours of the Budget are likely to stay the same, in terms of the public capex orientation, slower rise in revenue expenditure and conservative revenue assumptions.
Sensex has been hitting record high levels every other day. Any back of the envelope targets that you think looks possible in the next 5 years? Will the market keep its long-term record of doubling every 5 years on average?
Given that earnings growth is in the mid-teens, it is unlikely that valuations will continue to re-rate higher.In one of your recent reports, you have expressed a preference for small and midcaps. That’s one pocket where many domestic institutional investors are finding overvalued. Do you think there are enough opportunities for long-term plays in the broader market without one being obsessively worried about valuation?
Domestic sentiment should continue to drive market returns. Although elevated oil prices pose a risk to domestic sentiment, improving current account and fiscal positions should mitigate this sensitivity. On a risk-adjusted basis, we prefer India’s small- to mid-cap segment, where high growth potential offers opportunities for significant returns. With the near doubling of public capex in the government’s agenda, capex recovery is likely to continue driving economic and corporate earnings growth for equity markets in the near future.
Unlike the ageing and dwindling population of many developed economies, India’s massive working-age labour force will support expansion of its resilient domestic consumption. While food and other staples form the bulk of India’s household consumption today, upward income and social mobility will drive growth across all consumption categories moving forward. Furthermore, despite an environment of elevated rates, positive macro conditions have supported robust corporate earnings. On a global basis, market consensus is expecting earnings growth of 7.7% this year. We note a stark divergence between the earnings trajectory of developed and emerging markets – while the DM space is expected to register earnings growth of 6.1% in 2024, the outlook for EM is vastly more upbeat with growth expected at 18.5%, driven by China and India.
Themes related to government capex, manufacturing, renewables, and domestic consumption have dominated returns in this phase of the bull run. Is it time for investors to shift gears or stick to the well-established and popular path?
We stay convicted on India’s structural growth story. The uptrend in investor interest and exposure will continue, as several factors continue to enhance India’s attractiveness as the world’s back office, for instance: (a) labour market tightness, (b) remote work, (c) intensifying geopolitical uncertainties highlighting the urgency of supply chain resilience, and (d) incentives by India’s government to encourage investments and infrastructure. If sustained over the longer term, these factors will attract a steady flow of foreign investments and business activity, driving economic and corporate earnings growth.
This is apparent in India’s strong GDP growth – 4QFY24 real GDP rose 7.8% y/y, exceeding expectations, with private consumption, investment growth, and external trade adding to headline growth. While private consumption grew by a moderate 4% y/y, investments were up a sharp 9%. We expect growth to stay in the 7% handle in 1QFY25 – stable global growth, public and household capex investments, rural recovery, and a healthier trade balance back our optimistic view.
Give us some insights on your views about gold and whether there is a short-term play in favor of the safe haven vs equities.
After a series of scintillating rallies in March and April, gold has been more range-bound in the past two months. In the short-term, gyrations in gold price are likely to be influenced by rates, the trajectory of which is highly data dependent. As such, in the absence of any major surprises for macroeconomic indicators such as inflation, jobs data and GDP growth, gold is likely to continue to trade sideways. In the medium to longer term, our views on gold are more bullish, with ongoing geopolitical tensions, structural central bank buying and potential right tail risk from the US election cycle and fiscal sustainability concerns as tailwinds for the precious metal.
In the near term, what are the biggest risks you see for equity investors in India even as the bull run looks teflon-coated?
India’s stock market has been trading at record highs with some valuations looking stretched in the near term, leaving little margin for error. While we recognise that India is a high-growth market, we remain selective on India equities.
A nimble approach towards liquidity management is likely to continue, given the resumption in government spending, FY25 budget, inflows on account of India’s inclusion in the global bond index, and frictional drivers like tax flows likely to determine balances after the elections. Markets have pinned hopes on a potential bond supply reduction due to the strong revenue buffer, though it remains to be seen if the cushion is instead utilised towards accommodating additional revenue spending needs. Timely regulatory action and macroprudential measures in the domestic financial system are likely to continue to address selected pockets of concern.
After a short break, FIIs have been net buyers in India after the elections. Once Fed rate cuts begin, do you think it will lead to more inflows?
In response to the uncertain macroeconomic environment globally, funds dedicated to markets with stronger domestic demand stories, such as India, continue to attract strong inflows. According to the Association of Mutual Funds in India (AMFI), India’s mutual fund assets rose to Rs 58.6 trillion (USD 701.90bn) in May this year, the fastest rise on record.
We can say with certainty that the Fed will undertake rate cuts this year and next. The magnitude of cuts, however, is up for debate. Potential Fed rate cuts could lead to increased inflows into emerging markets in general. India-dedicated funds have seen ongoing inflows, but with valuations at elevated levels, investors will be keeping an eye on corporate earnings growth to support current market prices.
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